India's top housing market headed for correction?

Mumbai saw its most expensive apartment sale on record last month, with a sea-facing duplex located in the highly sought after Malabar Hill area fetching a staggering $9.1 million, according to local media reports.

The combination is increasing the risk of a home-price correction in India's financial center over the coming months, analysts say, noting housing prices in Mumbai have risen nearly 70 percent over the past four years.

"With sentiment low, only buyers that are from double-income households or [are] financially well-off are committing to real estate; the majority remain cautious. Investors also aren't active in the market, they are waiting on the fence," Sanjay Dutt, executive managing director for South Asia at Cushman & Wakefield told CNBC.

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Inventory levels in the city have risen to around 48 months, double the 20-24 month level regarded as healthy, according to Jones Lang La Salle. Meanwhile, sales volumes have slowed considerably from around 17,000 units in the fourth quarter of 2011 to 11,800 units in the second quarter of 2013, according to data from Knight Frank.

"The pile up of inventory is alarming. Adding to this, developers' financial conditions are stressed. Their revenue streams have dried up due to falling sales," said Samantak Das, director, research and advisory service at Knight Frank India.

Many of the country's real estate developers are saddled with high debt levels brought on by ambitious expansion plans in the recent years. And with banks shying away from lending in the face of rising non-performing loans and private equity funds exiting the Indian market, their funding options are becoming increasingly limited, Das noted.

"The best way for them to resolve this is to increase sales by softening their prices as far as possible to invite buyers, [though] it's difficult to say when they will," he added.

Critical period

The next six months will be a critical period for developers to assess whether or not they need to cut prices, analysts say, as upcoming religious festivals including Diwali, which falls in November, and Gudi Padwa next March are regarded as an auspicious time to buy real estate.

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"Developers are doing their best to hang on as we're near the beginning of the festive season in India - when they see maximum activity. They are banking on this period to bail them out," said Ashutosh Limaye, head of research and real estate investment services at Jones Lang LaSalle India.

At the moment, developers are attempting to lure buyers by offering incentives such as discounts of around 5 percent for a limited period, absorbing stamp duty charges, or providing furnished homes, he said.

"All indicators hint that a price correction is due, sales during the festive season will really tell us," Limaye said.

10-20 percent correction

Dutt of Cushman & Wakefield forecasts a 10-20 percent drop in new home prices between now and next March.

He expects a 5-10 percent correction in projects that are already under construction, and a 10-20 percent correction in new launches where construction has not yet begun.

"New launches are where the majority of developers will give higher discounts because they want to fund construction. That's where the pain is because if you have purchased land [and] spent money on taxes, you're incurring losses every day," Dutt said.

As for homes that are ready for occupation, prices are likely to remain well supported as there is sufficient demand from genuine end-users, said analysts.

"The resale market and ready-to-move market always have an upper hand. The consumers know what they are buying, and the risk of completion isn't there...completion of projects is a big question mark in this environment," said Das of Knight Frank India.